Financial and Economics Literacy: Doc

Financial and Economics
Literacy

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
1. Pursuit of profit maximisation is consistent with consumer sovereignty...............................1
2.Examination of the market structure, demand and supply of the companies...........................2
3.Concept and objectives of the financial management..............................................................3
4. Contribution of environmental policy, fiscal policy, supply side policies to UK economic . 5
Prosperity....................................................................................................................................5
5. Calculations.............................................................................................................................7
a. Ratio Analysis.........................................................................................................................7
b. Present Value..........................................................................................................................8
c. Net Present Value....................................................................................................................8
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
Financial literacy is considered as the process of financial, credit and debt management
which is required for carrying on any business and other operational transactions. It is very
important to have accurate and correct knowledge and information about the financial and
economical concepts so as to make financially decisions. It also involves knowing of how to
make appropriate economic choices, understanding role and impact of economy in the society
and making use of entrepreneurial skills for enhancing the operational productivity and growth
options. The report will be based on the business and financial economics principles used in
international context. Further it will show that how the governmental, monetary and economic
policy along with the macro & micro concepts and models have impact to business decision
making. Also, the report will shed light on financial rationale and its interpretations having
impact on the decisions of users and stakeholders. At last, the report will discuss the relationship
between theory and application in business and financial economics.
MAIN BODY
1. Pursuit of profit maximisation is consistent with consumer sovereignty
Consumer sovereignty is defined as the mechanism in which consumers hold the power
and authority to influence the production and its operational decisions on the basis of what goods
and services have been purchase by them. Consumers have the power to influence the demand
level for company's products and services. It simply refers to the authority of consumers to
determine and assessed that what will be produced through their purchases of goods and services
decisions.
The power of consumer includes manipulation of the market forces by influencing the
demand situation by determining what should be produced in the market. It basically means that
the production function of company depends highly on the psychology as well as the choices and
preferences of consumers (Epstein and Leoni, 2017). Consumer sovereignty works in the free
market economy due to privatization along with lesser or no government intervention.
Consumers affects the profit maximisation factor of the company as well. As consumers
are free to purchase or consume goods and services from the market place as per they
preferences. With increase in the demand of these products and services, the prices also will rise
and thus provides profitable and fruitful situation for companies. It also helps in seeking
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competitive advantage & high profit margin by entering into the production function of these
goods for ensuring supply on time.
It is considered as the economic theory in which consumers have the right to best
determine about what goods and services should be produced by the company in the society.
Producers should focus on the needs of consumers and then produce accordingly so that goods
manufactured can be easily sold.
This also means that consumers can make use of their purchasing or spending power in
form of votes for goods and services which are available in the market. As a result of which,
producers emphasizes only to those preferences which has high demand and then produce goods.
It is thus an economic concept which refers to the controlling power of consumers over
the production decision and profit earning (Sassatelli, 2015). With the help of consumer
sovereignty optimal allocation of scarce resources can be done by focusing on what final
products should be produced for meeting the expectation level of consumers.
It also helps producers in achieving the economies of scale along with minimum cost of
production and operation. The company should make use of scare resources effectively and
efficiently towards the attainment of goals and objectives in a cost effective manner thereby
fostering sustainable development of the economy.
2.Examination of the market structure, demand and supply of the companies.
Market structure- markets are categorized by the degree of their competitiveness and the
pricing. The market structure is classified in four types that are perfect competition, monopoly,
oligopoly and monopolistic competition. The market structure of the Tesco is said to be as
oligopoly market as the supermarket industries in UK described under the oligopoly. Tesco is not
the only supermarket in the UK (Azevedo and Leshno, 2016). It acts as the dominant
shareholder but cannot be called as a monopoly as there are many other firms which are in
competition with the Tesco. Mac Donald's also reflects the oligopoly structure where there are
few nos. Of large and the small firms in particular market and the industry with the very limited
competition. Mac Donald's operate in this structure because very few firms in the business of fast
food industry are present in the America and are the price makers with the interdependence on
the policy actions. British Airways also functions under the oligopoly structure as airline industry
in the UK. Hairdressers industry has the market structure of monopolistic competition as it has
many competitors with minimum market share and not considered as the price makers.
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Demand and supply- This is a model that helps in understanding the price determination
of the particular quantity of the goods in the market. It is about the product's price. The demand
theory states that rise in the price of the product results in declining demand of that product. With
reference to this model, Tesco provides a wide variety of the products and several services are
offered in market. The low price of the product of tesco will attract large customer which in turn
enhance the demand of the product. Tesco is facilitating club card to its customers so that they
get points on their spending and discount can be availed by the buyer which is a factor of high
demand and this leads to high supply (Stevens and Johnson, 2016). Mac Donald's demand and
supply theory indicates that the products that it offers are associated with several factors that
influences the demand of the customers. The foremost factor is the price and the prices of the
same products offered by the competitors also has a great influence on the demand and supply
theory of an entity. If the rivalry of the Mac Donald's is offering the product at the low prices
then the demand of its product reduces. On the other hand high competition leads to high
bargaining power of the supplier. Advance in technology increases the production and the supply
also increases. As British Airways is an airline company so its demand and supply theory relates
with the routes which means the more the availability of the alternative routes, demand is largely
elastic. British Airways chosen to start its services only in the business class from London to
New York at the time of closing of shorter routes (Zerang, Taleizadeh and Razmi, 2018). Thus,
they are changing their supply in order to cater the needs of those market segments where
demand is inelastic. For hairdressers the demand and supply theory reflects that as there are
larger nos. Of competitors present so the demand for its product is highly elastic and the supply
is also elastic.
3.Concept and objectives of the financial management.
(a)Difference between the wealth and profit maximization.
The major concern of the financial management is the optimum use of funds for increasing value
as well as the earnings of the enterprise. The most important paramount objectives of financial
management are profit maximization and wealth maximization. Profit maximization means
gaining highers profits whereas wealth maximization means increasing the market value of the
company's shares which in turn aims at evaluating the worth of the business (Difference Between
Profit Maximization and Wealth Maximization, 2019). The primary and foremost objective of the
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firm is to maximize the profits as it relates with the efficiency of the performance of the business.
However, Wealth maximization focuses on creating the stakeholders value. There always exist a
conflict and contrast between the both profit and the wealth maximization.
Basis Profit maximization Wealth maximization
Concept The main aim for operating the
business is maximizing the
profit or earning the larger
income.
The ultimate aim of the
business concern relates with
the improvement in the value
of its own shares in the overall
market.
Focuses on Through this objective a firm
state about its short term
achievements.
This leads the firm in
achieving the long term goals
so that firm attains consistent
growth and stability in the long
run.
Risk and the uncertainty Profit maximization does not
take into account the risk and
the uncertainty associated with
any event for the firm in the
future.
Wealth maximization
considers the risk and the
uncertainty so that corrective
action can be taken by the
enterprise for mitigating the
risk.
Benefit It acts as the basis for
evaluating the operational
performance and efficiency of
an entity.
It enables the firm in attaining
the market share at the larger
pace.
Recognition of the returns on
time based pattern.
This objective does not
recognize the returns generated
on the basis of time.
This objective helps in
recognizing the time based
returns.
(b) Discussion of the superiority of wealth maximization over profit maximization.
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The reason behind the superiority of the wealth maximization over the profit maximization is
that it relates to the improvement of the shareholder's wealth which in turn enhance the image of
the business across the globe. Wealth maximization is concerned with the consideration of the
value in relation to the cost attached with the concern. Reduction of the total value from the total
cost results in the business operation. Maximization of wealth contains both the elements risk
and the time which are the crucial aspects for every business to run its operation smoothly in the
future. It provides for the efficient and effective allocation of the resources which results in
generation of the larger profits and returns while profit maximization does not emphasize on
procurement, allocation and utilization of the funds (Bharucha, 2019). The economic interest of
the society is also assured by the achievement of wealth maximization objective. It is based on
the cash flow and not the profits so it is superior to the profit maximization as cash flows shows
the definite and the exact results without any ambiguity in relation to the accounting profits.
Wealth maximization presents the long term view which is essential for meeting the short term
profits as at the cost of long term sustainability of the business lets ton achieve the short term
income by the managers. Moreover, Wealth maximization considers the concept of time value of
money which states the value of present and the future money does not contain the same value
(Lusardi, 2019). In wealth maximization, the cash flows for the future are discounted at the
appropriate rate of discount for representing the present value.
4. Contribution of environmental policy, fiscal policy, supply side policies to UK economic
Prosperity
The economy of a country depends on various policies, guidelines, framework
formulated related to the environment protection, monetary & fiscal measures, economic factors
and supply side policy. All these factors has contributed towards the economic prosperity of UK
as follows:
Environmental policy - It deals with the commitment of a company or government to adhere to
the laws, regulations and policy mechanisms concerning with the environmental issues such as
air & water pollution, waste management, ecosystem management, protection of natural
resources & species. The company should focus on implementation of eco friendly policy at the
global level so as to solve & improve the issues of global warming and climate changes. Its main
role is to manage and direct the guidelines, provisions and use of the environmental resources in
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sustainable way which bring improvements in the country's economic prosperity and human
welfare for both the current and future generations (Rosenbaum, 2016). The economic
performance and social progress can be measured by identifying the factor which contributes to
human welfare by improving the living standards, health, education and relationships and
insecurity of an economic as well as a physical nature.
Fiscal policy – The term fiscal policy is defined as the means by which the government of the
country adjusts its spending and expenditure levels and rate of tax so as to monitor and evaluate
the influence of the nation's economy. It is considered as the strategy part of monetary policy
through which the central bank of the country influences the money supply of the whole nation.
The fiscal policy along with monetary policy helps in directing the economic goals of the
country. The fiscal policy has contributed in UK growth and prosperity by achieving the
following objectives timely and effectively:
1. Full employment – Every economy objective is to achieve full employment or a state of
full employment & avoiding unemployment level. For reducing unemployment and
under-employment situation the state has to spend a sufficient amount on the social and
economic overheads.
2. Price & Economic stability – Economy should maintain the level of price for meeting
both the demand and supply factors of market. With price stability, customers will be
satisfied and will be able consume products and services which will bring stability in the
development of country's economy (Bianchi and Ilut, 2017).
3. Equitable distribution of wealth and income – For bringing up socially backward areas of
the country and maintaining the standard of living, it is very essential to have equal
distribution of wealth and income among every individual.
4. Optimum allocation of resources – For smooth functioning and effective attainment of
country's economic goals and objectives, it is very important to have optimal allocation
of resources in the country.
5. Accelerating the rate of economic development – Different fiscal measures like taxation
policy, public borrowing and deficit financing should be used in proper way to mitigate
the adverse effect on production, consumption and distribution level of the country. It
should promote economy as a whole so as to raise the national income and per capita
income of the country.
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Supply Side Policy - It mainly deals with the micro-economic policies with the aim of making
markets and industries operates more effectively & efficiently. It also focus on contributing to
the faster underlying-rate of growth of the real national output of the country (Lazarus, Erickson
and Tempest, 2015). This policy has helped UK in gaining economic prosperity by:
1. By reducing the inflationary pressure in the long term period by gaining support of
efficiency and productivity in the product and labour markets.
2. By creating jobs and sustainable growth with positive effect on the productivity of
labour and competitiveness.
3. By making improvement in the supply-side performance so as to achieve the
sustainable growth without making any rise in inflation rate.
5. Calculations
a. Ratio Analysis
Zenibia Limited
accounts
Particulars Formula Amount ( in £m) Amount ( in £m)
2017 2018
Current assets 3277 2460
Current liabilities 2833 2097
Current ratio
Current
assets/Current
liabilities 1.16 1.17
Current assets 3277 2460
Stock 250 208
Quick assets Current assets-Stock 3027 2252
Current liabilities 2833 2097
Ouick ratio
Quick assets/Quick
liabilities 1.07 1.07
Debtors 2168 1945
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Sales 7653 6876
Debtors payment
period Debtors/sales*365 103.40 103.25
Cost of goods sold 5778 5342
Average Inventory 250 354
Stock turnover period
COGS/average
inventory 23.11 15.09
b. Present Value
c. Net Present Value
Year project A project B Disc. @ 5.88% Discounted Cash
flows of project A
Discounted Cash
flows of project B
1 0 60000 0.944 0.00 56667.93
2 0 30000 0.892 0.00 26760.45
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3 0 25000 0.842 0.00 21061.93
4 0 20000 0.796 0.00 15913.81
5 175000 40500 0.752 131512.91 30435.84
Total discounted cash flow 131512.91 150839.97
less: initial investment 175000 175000
Net present value -43487.09 -24160.03
CONCLUSION
From the above report it is concluded that, Financial and economies literacy is the most
important aspect for every business organization that helps in assessing the economic
information and informed decisions can be made about the financial planning, debt, profits and
wealth accumulation. It facilitates the assessment of the financial literacy on essential economic
behaviors. It is crucial for attaining the success of the economic reforms. The above study also
facilitate information regarding the market structure and the demand and supply of different
companies such as Tesco, Mac Donald's, British Airways and Hairdressers which enables in
knowing the various structures of the market and the factors that affect the demand and supply of
the product.
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REFERENCES
Books and Journals
Azevedo, E. M. and Leshno, J. D., 2016. A supply and demand framework for two-sided
matching markets. Journal of Political Economy. 124(5). pp.1235-1268.
Bharucha, J. P., 2019. Determinants of Financial Literacy Among Indian Youth. In Dynamic
Perspectives on Globalization and Sustainable Business in Asia (pp. 154-167). IGI Global.
Bianchi, F. and Ilut, C., 2017. Monetary/fiscal policy mix and agents' beliefs. Review of
economic Dynamics. 26. pp.113-139.
Epstein, R. A. and Leoni, B., 2017. “Consumer Sovereignty” and the Law. In Law, Liberty, and
the Competitive Market (pp. 33-37). Routledge.
Lazarus, M., Erickson, P. and Tempest, K., 2015. Supply-side climate policy: the road less
taken. Stockholm Environment Institute, Seattle.
Lusardi, A., 2019. Financial literacy and the need for financial education: evidence and
implications. Swiss Journal of Economics and Statistics. 155(1). p.1.
Rosenbaum, W. A., 2016. Environmental politics and policy. CQ press.
Sassatelli, R., 2015. Consumer culture, sustainability and a new vision of consumer sovereignty.
Sociologia Ruralis. 55(4). pp.483-496.
Sims, C. A., 2016, August. Fiscal policy, monetary policy and central bank independence. In
Kansas Citi Fed Jackson Hole Conference.
Smith, Z. A., 2015. The Environmental Policy Paradox (1-download). Routledge.
Stevens, G. C. and Johnson, M., 2016. Integrating the supply chain… 25 years on. International
Journal of Physical Distribution & Logistics Management. 46(1). pp.19-42.
Zerang, E. S., Taleizadeh, A. A. and Razmi, J., 2018. Analytical comparisons in a three-echelon
closed-loop supply chain with price and marketing effort-dependent demand: game theory
approaches. Environment, development and sustainability. 20(1). pp.451-478.
Online
Consumer sovereignty. 2019. [Online]. Available through: <https://opinionfront.com/what-is-
consumer-sovereignty>.
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Difference Between Profit Maximization and Wealth Maximization.2019. [Online]. Available
through:<https://keydifferences.com/difference-between-profit-maximization-and-wealth-
maximization.html>
Economic and Financial Literacy. 2018. [Online]. Available through:
<http://www.neda.gov.ph/economic-and-financial-literacy-week-2018/>.
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